Investors edgy ahead of US poll

Investor nervousness over the United States election on Tuesday and its implications for fiscal policy in the world’s largest economy will dictate market sentiment this week.

The Dow Jones Industrial Average shed 1.05 per cent to 13,093.16 on Friday while the S&P500 dropped 0.94 per cent to 1414.20 after falls in gold, energy and materials shares indicated a reduction in investor appetite for so-called risk assets.

After the election, focus will turn to management of the fiscal cliff, a large reduction in the budget deficit through the tightening of fiscal policy which would see Bush-era tax breaks expire and spending cuts take effect in January. There are concerns these cuts would be a further hit to consumer confidence and growth, with estimates of its impact on US GDP ranging from between 1 to 5 per cent.

BT Investment Management macro-strategist Joe Bracken said a
Mitt Romney
win would be broadly positive for markets as Republicans would have a monopoly on power and see broad extension of tax cuts.

“If [
Barack] Obama
gets in there’ll be a bit of holding back on [any rally in] risk assets while the administration sits down with Republicans to figure out how to grow the economy," he said.

Related Quotes

Company Profile

The fall in key US indices on Friday came despite better than expected jobs growth for October, with payrolls expanding by 171,000 workers to outstrip an expected 125,000, while unemployment rose to 7.9 per cent from 7.8 per cent.

UBS Washington economist Sam Coffin said the October jobs report was too complex to influence the election outcome.

“The extreme weakness in capital expenditure of late sure doesn’t suggest that firms are in an expansionary hiring mood," Mr Coffin said.

JPMorgan chief US economist Michael Feroli said the fly in the ointment was growth in labour income at an average annual pace of 2.4 per cent. “This pace of labour income growth may be quite acceptable for corporate profits, but it does pose headwinds for consumer spending growth," he said, reiterating hopes of 2 per cent annualised US GDP growth.

Market watchers expect guidance on how to resolve the fiscal cliff after the election.

UBS equity strategist David Cassidy suggested a bipartisan negotiation would likely see the fiscal cliff have an impact of less than 1 per cent of GDP. Mr Coffin said the possibility of ongoing recounts after the election would make resolution of fiscal issues more difficult.

“Brinksmanship on the fiscal cliff poses a threat to markets and the economy," he said.

Asian markets were mostly higher on Friday, with the Hang Seng adding 1.33 per cent, the Nikkei 1.17 per cent and China’s Shanghai Composite up 0.6 per cent to 2117.05 after a purchasing managers’ index released last week showed manufacturing growth for the first time in three months during October.

In Europe, markets were mostly higher, with the Euro Stoxx index adding 0.52 per cent to 2547.15.

Westpac global head of rates strategy Russell Jones said it was time to decide whether Greece would remain in the euro or be allowed to leave. “Keeping the economy and its people in fiscal austerity induced purgatory is becoming increasingly ridiculous," he said. “The policies of the troika have failed."

In Australia all eyes are on the Reserve Bank on Tuesday, with markets divided on the prospect of a rate cut. Traders are betting a 52 per cent chance the central bank will reduce rates by 0.25 percentage points, a move which would be positive for equity markets.

Commonwealth Bank currency strategist Joseph Capurso said market volatility would rise if investors felt the fiscal cliff was unlikely to be addressed.